Sutherland Alert: Regulators Consider Whether Stable Value Contracts Should Be Subject to Regulation as Swaps under the Dodd-Frank Act

by Fred Bellamy, Jamie Cain, Tom Gick, Steve Roth, and Ann Battle

In addition to requiring the Commodity Futures Trading Commission (the CFTC) and the Securities and Exchange Commission (the SEC) to promulgate rules further defining the terms "swap" and "security-based swap" under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), Title VII of the Dodd-Frank Act requires the CFTC and the SEC to conduct a study of whether stable value contracts (SVCs) fall within the term "swap." This study is to be completed by October 21, 2011, 15 months after the enactment of the Dodd-Frank Act. In furtherance of their study, the CFTC and the SEC have published a request for public comment on SVCs (the SVC Joint Release), a copy of which is available here. Comments are due on September 26, 2011.

The definition of swap contained in Section 1a(47) of the Commodity Exchange Act (the CEA), as amended by the Dodd-Frank Act, and the definition of security-based swap contained in Section 3(a)(68) of the Securities Exchange Act (the Exchange Act), as amended by the Dodd-Frank Act, are very broad and could encompass a number of commercial instruments, including insurance and annuity products, that historically have not been considered swaps. The CFTC and the SEC previously issued joint proposed rules and interpretive guidance further defining the terms "swap" and "security-based swap" (the Product Definition Joint Release). A copy of the Product Definition Joint Release is available here, and copies of the public comments received in response to it are available here. Both the proposed rules and the interpretive guidance contained in the Product Definition Joint Release clarify that certain insurance and annuity contracts are not swaps under the CEA or security-based swaps under the Exchange Act, but they do not address SVCs.

The Dodd-Frank Act directs the CFTC and the SEC to (a) determine whether SVCs fall within the definition of swap and (b) if the CFTC and the SEC determine that SVCs fall within the definition of swap, determine whether it is "appropriate and in the public interest" to exempt SVCs from the definition of swap and issue regulations implementing such determinations. Until the effective date of such regulations, SVCs will not be subject to regulation under Title VII of the Dodd-Frank Act. In addition, the Dodd-Frank Act clarifies that any SVCs in effect prior to the effective date of such regulations will not be considered swaps.

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